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Hospitals Get Payout on Claims Against Insolvent HMO
By Gina Passarella
October 24, 2006
The Legal Intelligencer
A group of more than 75 health care systems is expecting this week the final check in their settlement of claims against an insolvent Medicaid HMO.
Local hospitals began to notice in mid-2000 that their claims to HRM-Pa., a division of Health Risk Management, weren't being paid on time, according to the attorney for the claimants, David E. Loder of Duane Morris.
When they asked the Department of Public Welfare (DPW) what they should do, they were told to continue to provide care, Loder said.
By October 2001, the plan had gone insolvent, and the group was left with more than $60 million in unpaid claims.
"Often times it's the providers that get left holding the bag," Loder said.
Roughly 150 hospitals organized by the Delaware Valley Healthcare Council looked to two places to try to collect on their claims.
The DPW, Loder said, had some responsibility to manage the HMO and monitor its stability.
The health care providers initiated suit against DPW, and by December 2003, the department agreed to a settlement of $10 million, Loder said. The settlement was later modified to pay providers who later consolidated their actions into the group's action. That modification brought with it an additional $1 million for the providers, Loder said.
Mark H. Gallant of Cozen O'Connor represented some of those providers who consolidated their cases with the health care council and served as co-counsel in the matter.
He said the government agency typically takes the position that it is not liable considering it had already paid the HMO in advance for its services.
"It's pretty unusual that the Department of Public Welfare, when pressured with litigation, agreed to settle," Gallant said. "That sort of result without a court order is virtually unprecedented."
Still nearly $50 million short of their existing claims, the group then submitted all of its unpaid claims to the liquidator of HRM, the Pennsylvania Department of Insurance. The liquidator had collected the remaining assets of HRM, which totaled $25 million, Loder said.
As is normal with a liquidation process, the liquidator would have to review every claim. By 2006, the beginning of this process had cost the estate close to $4 million, Loder said, adding that the most substantial of the group's claims had yet to have been reviewed.
Also customary when an HMO turns insolvent, Loder said, is that differing types of creditors are ranked in order of priority of payment. Auditors, adjusters and attorneys are generally the first to get paid, he said, leaving time for the estate's worth to dwindle through litigation or other expenses. The health care council was about third on the list of creditors to be paid, he said.
Loder said the group proposed a unique plan to avoid spending years and millions of dollars exhausting the resources of the estate. The group proposed to the liquidator that the department pay the more senior creditors 100 percent of what they are owed. The group would then agree to take whatever was left over in the estate without each claim having to be reviewed.
The Commonwealth Court eventually approved the settlement and the group received $18.47 million, or the remainder of the estate, Loder said.
According to Gallant, the upside for the liquidator was that the group agreed to split the money on its own among its members. The original payment was dispersed on Sept. 25. Loder said the group was told by counsel for the liquidator that the interest from the account would be coming in a separate check this week for about an additional $750,000.
Both Gallant and Loder said that the settlement maximized the recovery for the hospitals.
"It's a damn good result," Loder said.
In total, the group received a little less than half of its original claims against the insolvent HMO. The money will be divided exactly proportionate to the number of claims each health care provider had, Loder said.
William E. Mahoney Jr. of Stradley Ronon Stevens & Young represented the insurance department and said he would have to refer all requests for comment to the department.
In an e-mail statement, department spokeswoman Melissa Fox said "it was a novel settlement that was unique to the specific circumstances in the HRM liquidation proceeding and that it was done while preserving the priority distribution scheme set forth in the statute."
Andrew Wigglesworth is the president of the Delaware Valley Healthcare Council and was responsible for organizing the group of providers in this case. While the group would have preferred not to go through dealing with an insolvent insurer, the outcome of the case was "phenomenal," he said.
The settlement with DPW, he said, preserved the notion that the department had a responsibility when it comes to Medicaid HMOs. Wigglesworth said HRM was the third failed Medicaid HMO in this region. He said he was happy to see that the liquidator used its flexibility in coming up with this type of settlement.
"The associations were not chewed up in the context of extensive administrative and legal expenses by the liquidator," he said.
Some of the health care systems involved in the case included the University of Pennsylvania Health System, Crozer-Keystone Health System and Temple University Health System.
This article originally appeared in The Legal Intelligencer and is republished here with permission from law.com.
